The NGN Bridge: Drivers, Trends, and Carpentry

You’ve probably noticed by now my enthusiasm for the metro space.  I think that enthusiasm is vindicated by the recent Street speculation on Verizon’s next-gen metro program, which the Street analysts say will go primarily to Ciena with a nod toward Cisco.  The thing is, there are other fundamental numbers in play that have been validating metro as a market for years now.  We’re just starting to see the results, and we’re not done.  Some of the trends weave through our ever-popular themes of NGN, SDN, and NFV.

If you look at BEA data you find that between 1990 and 2013 (the last posted year), growth in consumer spending on communications services has run about 30% ahead of growth in personal spending overall.  But what’s in this category tells the real story.  Telecom services is lagging overall spending growth by about 10% through that period, spending on postal/package services has fallen by more than half, and spending on Internet access has grown three hundred times faster than personal spending overall.

Despite what people may think, consumer Internet access is a metro service.  If this service is the only driver of increased ARPU to speak of in the whole of communications, which is what the data (from the Bureau of Economic Analysis) says, then the only area where we can expect to see much enthusiasm for additional investment is in the metro.

Here’s some other interesting stuff.  If we use the same 1990 baseline, growth in business spending on IT overall has been about 30% slower than investment in equipment overall.  For networking it’s been only about 17% slower, but slower nevertheless.  So what we’re saying is that the consumer is the real driver of networking, and likely the real driver of IT.  Consumers, we must note, do nothing in terms of site-to-site communication, they want experience delivery.  And with the drive to mobility, their experiences are increasingly local.

Profitable, mass-consumed, video is delivered from metro caches.  Popular web content in general is cached in a metro area.  Ads are cached, and as we start to see mobile-behavioral services emerge we’ll see that those services are fulfilled from cloud infrastructure that’s local.  NFV is going to host virtual functions proximate to the service edge in the metro, so NFV cloud resources will also be metro.  Are you getting the picture here?

The Street analysis of Verizon’s metro update spending is interesting because 1) it’s relevant to what is for sure the future of capex and 2) it demonstrates that metro is more about fiber transport than about IP.  Ciena is the projected big winner here, but in technology terms it’s optics that’s the big winner.  My model says that metro spending, which is now running about 40% optical, will shift through the rest of this decade to nearly 60% optical.  IT elements, which make up less than 5% of metro spending today (mostly caching/CDN, IMS, etc.) will grow to make up almost 17% of metro spending by 2020.  That means that all network gear other than optical, which today accounts for more than half of metro spending, will account for only 23% by 2020.

There’s plenty of precedent for a focus on experiences and hosting.  In our golden analysis period here (1990-2013), the telecom industry has lagged businesses overall in spending on fixed assets, but information processing services have seen six times the growth rate in investment.  This, with no significant contribution at that point from the cloud.  That means that we are generating more spending growth on infrastructure outside telecom.  To be sure, broadcasting and telecom has about four times the spending of the information processing services sector, but that’s obviously changing given the difference in growth rate.  In the last five years, in fact, the two sectors added about the same number of dollars in capital investment even though, as I said, information processing is a quarter the size of telecom/broadcasting.

The net trend is obvious.  The cloud is going to shift more and more information services to metro.  NFV is going to do the same, and as a result of this we’ll be seeing most data center communications become metro services.  Given that companies network sites and not people, and that sites are not increasing by any significant percentage you can see that all of the “services” that have upside for the future are metro services.  And all of these metro services are bending, in infrastructure terms, toward fiber and IT.

The big vendors in the IT space should be in the cat-bird’s seat here, and certainly some of them (like HP) are.  The big network vendors need to have a fiber position or a server position to be well-set.  Many, including Alcatel-Lucent and Ciena and Infinera, have fiber and Cisco has both fiber and servers.  NSN, Ericsson, and Juniper have neither to speak of, so these guys are the ones who have to face the biggest transformation.  Ericsson has already signaled its intentions to rely more on integration and professional services, NSN is looking at a merger with Alcatel-Lucent according to the Street, and Juniper has wanted somebody to buy them for a long time.

Why has this sort of thing not received much attention?  We are looking at the future of networking though past-colored glasses.  We are presuming that success of the Internet means success of routing, that success of the cloud means success of traditional data center switches, and that network investment will be spread out over the globe and not focused on metro-sized pockets.  As a result, we’re missing a lot of the real trends and truths.

Our industry trends strongly suggest that carrier infrastructure is trending toward a polarization between a bottom fiber layer and a top layer consisting  of virtual elements  in the form of software, hosted on servers and sited in data centers close to the point of user attachment (the metro, of course).  It’s not likely in my view that we’ll see a lot of fiber guys getting into the server space, nor will we be seeing server kingpins launching fiber optic transport and agile optics.  But this polarization does put pressure on the optical people because software is almost infinitely differentiable and fiber is definitely not.  That suggests that an SDN and NFV strategy and software partnerships and relationships (of the type Ciena is attempting) may be absolutely critical for fiber players to sustain margins.

Virtualization is what develops the new-age binding between optics and IT elements, and that’s a software construct.  Anyone can be a software player; even optical giants could do prodigious work there if they wanted to.  So it is likely that virtualization software in the manifestations of both SDN and NFV will frame how the two polarized ends of future infrastructure will join, and who will do the carpentry.

It’s also worth noting that the statistics I’ve been citing suggest that SDN and NFV are not “driver technologies” forcing change, but rather are steps being taken to accommodate broader market sweeps.  If that’s the case (and I believe it is) then it further validates the view that SDN and NFV could be opportunities for vendors who face “fundamentals-driven disintermediation” to establish a new model that could survive into the post-2020 future.  Certainly it means that foot-dragging on SDN and NFV are more likely to do harm than good, because preserving the current market paradigm would mean reversing macro trends no vendor can hope to control.

That, to me, all of this means that software is critical for the current electrical-layer incumbents whether they see it or not.  Even though these guys are by my reckoning all sliding into a pit as the polarization between optics and IT develops further, they have a chance to redeem themselves (albeit at a lower level of sales) through software.  Even this is probably not a surprise; nearly all the network vendors have been promising a greater focus on software for years.  SDN and NFV are simply the latest technologies to represent this long-standing trend, and they probably won’t be the last.

They will be critically transformational, though.  Economics is what transforms networking in a force sense; technology only guides the vector through which the force is applied.  We have some positive outcomes still available, some cat-bird seats still available.  We just need to see who sits in them.